FIN331 Final Mega Set
The Securities Act of 1933 and the Securities Exchange Act of 1934 gave the SEC authority to monitor
exchanges and required listed companies to file a registration statement and financial reports with the SEC and the exchanges.
Discount Brokerage Firm
executes orders only upon requests; no advice provided
Payday Loan Centers
exemption expired in july 2010, no longer allowed in AZ
preemptive rights offering
existing shareholders can buy new common stock at lower price than market value
market risk premium
expected return of market - risk free rate
Capital Asset Pricing Model
expected return of portfolio = risk free rate + beta * market risk premium
bond king video after trumps election:
expected year end to go above 20% but dditn expect it to rise so quickly in a short period of time.
prospectus
extensive IPO guide distributed to public
asset returns are perfectly normal
false
what could go wrong w visa abroad?
fees
Non Interest Income
fees charged on services such as lockboxes, banker's acceptances, cashier's checks, forex transactions
Back end load
fees paid to the mutual fund company when selling a mutual fund
FINRA
financial industry regulatory authority
Dodd-Frank Act of 2010
financial reform act that: 1. regulated mortgage backed securities 2. ensured orderly liquidation of financial institutions 3. created consumer financial protection bureau 4. put limits on proprietary trading
penalties for faulty due diligence
fines or imprisonment
Proprietary Trading
firms use their own funds to make investments for their own account; they trade to make a profit for themselves
Unit Trusts
fixed number of shares most commonly used with bonds no active trading assembled by sponsor, sold with commission, turned over to trustee
fixed rate mortgage:
fixed rate of the length of ur mortgage
cme group website:
for trading commodities futures. shows info on soybeabs, rice, livesock, dairy, whey, lubmer, softs, bifuels, energy, oil, electricity -also has equity indexes -OTC clearing of derivs, options, weather futures, real estate -overall takeaway: anything u r wanting to speculate or hedge in, there is a good chance thre might b a futurers contract outt here for it
Bernie Madoff
former non-executive chairman of the NASDAQ managed a large hedge fund embezzled fund money operated a ponzi scheme arrested in 2008 and sentenced to 150 years in federal prison
bermuda style option:
gives a date like once a month as ane xercse date--is negotiable
Round lot
group of 100 shares of a stock, or any group of shares that can be evenly divided by 100, such as 500, 2,600 or 14,300
comapnies use derivatives or pricing techniques tooo.....
hedge foreign exchange risk
hedging w futures:
hedgers want to get rid of risk -to transfer risk form hedgers to speculators (mjr futures mkt function) -perfect hedge: any loss in one position is exactly offset by an profit on the other position
Segregated Accounts
high net worth individuals better control over taxes
Fixed pmts usually make ur monthly pmt:
higher. so if this is ur concern, then the tendency is to go w the adj rate mort
Arts fallout risk story:
house he was gonna buy didnt accept a 15k lower price bc of repairs then it would fall out of escrow and there would be no mortgage
acceptable collateral for residental mortgages:
houses, condos, cooperatives
adjustable rate mortgage:
i rate changes with the i rates of the economy
Global Research Analyst Settlement (2002)
if securities firm underwrites IPO, analysts cannot promote stock for first 40 days after IPO
Currency forwards:
-contracts for delivery ro sale of froreign currency at future date -quan and deliv dates not standardized -not traded on exchange--likely a bank -usually resut in actual delivery or sale of the currency
i rate swap-- sovereign risk:
-countrys political conditions casuing adverse effects risk -differs from credit risk bc it depends on the fin status of the govt rather than on the counterparty itself
factors underlying option premium:
-current price of underlyign asset -strike price -time expiratino of the option -expeced price volatility of underlying asset over life of option -rfr of i over life of option -anticipated cash pmts (divs) on the underlying asst over the life of the option -time works against u as an option buyer--so ppl r usually willing to pay more 4 xtra time
indicators of potential performace:
-debt to service coverage ratio -loan to value
US govt mortgage insurers:
-dept of houseing and urban development (fed housing admin & veterans admin) -dept of agriculture (rural housing services)
exchange rate quote conventions
-direct quote: #local/one foreign -indirect quote: #foreign/one local
MBS blame in subprime meltdown:
-disconnect btwn mort orig and ownership -failure of rating agencies to properly eval MBSs -lack of due diligence of fin inst who packaged purch and insured MBS -securitization benefits still substantial (risk spreading, inc supply of cap to mort mkt, inc home ownership) -outide factors such as the level of i rates
Barings Bank case
-est 1763 -in 1995, 27 yo nick leeson circumvented trading restriction and invested much more than authorized -dummy 88888 account -losses > $600 mil -6.5 years in prison -Rogue Trader movie based on this
Mort orig process:
-eval credit risk (pmt to income ration and loan to value ratio) -committment letter form the lender (this lian at this i rate and x# of days to get it done) -choice of mortgage type (fixed or adj rate)
Reasons for Low Return on Assets (ROA)
-excessive interest expenses -low interest income -low non interest income -loan loses -excessive non interest expenses
Exchange rate systems:
-gold standard -bretton woods era 44-71 -smithsoniam agreement 71 -floating exchange rates 73 -pegged xchange rate system -eurozone arrangement
GNMA (Ginnie Mae) MBS
-govt natnl mort assc created in 1968 as a corm that is owned by fed govt -gaurantees timely pmt of principal and i to inv who purch sec backed by FHA and VA morts -big restrctrign of industry in 68-70
Use of morts by origionators:
-hold it in their portfolio -sell it to an investor - use it as collateral for the issuance of a security (securitization)
credit risk:
-if other party defaults on contract -exists for ITC transactions where a person relies on credit of other party -this is the role of the clearing hosue
Forms of call protection:
-in residential morts prepmt penalties are the only protection (seldom used) -in commercial morts, there are many possible protections (often used)
How to banks reduce credit risk?
-industry diversification of loans -international diversification of loans -selling loans -revising loan portfolio in response to economic conditions
futures trading has margin requirements:
-intial margin -maintenance margin -variation margin ****it is possible to lose mroe than u invested in a futures contract
SEC Private Placement exemptions
-intrastate offerings -small offerings of $5 mil or less -not public
Price of options:
-intrinsic value (eco val of option if exercised immediately, which is a val either greater than zero or 0. -time value (amt by which the option premium/price exceeds the intrinsic value)
forward swaps:
-involves an exchange of i pmts that does not begin until a specified future time -useful for fin insts or other firms that expect to be exposed to interest rate risk at some time in the future
rate-capped swaps:
-involves exchange of fixed rate pmts for floating rate pmts that are capped
equity swaps:
-involves the exchange of i pmts for pmts linked to the degree of change in a stock index
Foreign exchange dealers:
-large international banks, interbank market, are the core of this daeler based mkt -24 hrs a day -massive market
prviate mortgage orginiators:
-life insurance companies -pension funds
futures positions:
-long: buying contract, agreeing to buy the asset -short: selling the contract and agreeing to make delivery
Mutual Fund information sources
-prospectus -fund company -independent websites like morningstar, lipper, AAII
How to banks reduce market risk?
-reduce amount of transaction where the bank serves as a guarantor for clients -taking some trading positions to offset some of its exposure to market risk -selling risky securities
prepayment risk (futures contracts):
-refers to possibility that assets to b hedged may be prepaid earlier tha their designaed maturity
liquidity risk:
-refers to potential price distortions due to a lack of liquididty
Freddie Mae and Frannie Mac link:
-related to basically all federal morts in the country -both failed in the fin crisis - now govt sponsored enteties
Benefits of Mutual Funds
-risk reduction through diversification -professional portfolio management -lower costs -liquidity -variety -payment mechanism
i rate swap credit risk:
-risk that firm wont meet pmt obligations -The willingness of large banks and securities firms to provide guarantees has increased the popularity of interest rate swaps, but it has also raised concerns that widespread adverse effects might occur if any of these intermediaries cannot meet their obligations.
Rescue of Fannie mae and freddie mac:
-sept 2008 the us govt took over mgmt of the two -the treasury agreed to provide the funding needed to cushion losses form the mort defaults -in return the treas recieveid 1bill of preferred stock in each of the 2 cos - govt allowed them both to get funds by issuing debt sec so they coulf resume purch morts and ensure a more liquid 2ndary mkt fot hem
mortgage servicing income sources:
-servicing fee -ancillary income like late fees, comissions from cross-selling, and selling mailing lists -other loans
option pricing used to derive a stock's volatility:
-some inv asses a stocks risk by usinf the option-pricing formula to esimate the stocks anticipated volatility - by using the prevaling option premium and values for the other factors in the option-pricing formula, the implied volatility or implied standard deviation can be estimated
Who regulates S&L Associations?
Office of Thrift Supervision
Monoline insurance company
Provide their insurance services to only one industry, the capital markets.
bid quote
if the investor wants to sell a stock
mortgage life insurance:
if ur spouse dies, then mort gets paid off so u dont lose the house. art says its a good idea but usually pretty expensive so u need to look at other life insurance options like term life b4 u decide to get mort life insur.
Adjustable Rate Mortgages (ARM)
enable thrifts to maintain a more stable spread between interest revenue and interest expenses; reduces risk for thrifts and increases risk for customers
Credit Unions
endorsed by "occupy wall street movement"
market for corporate control
enhanced by LBOs
cross rates:
exchange rate btwn teo countries can be determined even if quoted in a 3rd currency Dollar price of currency x/dollar price currency y
In the origination process, what parameters of a bond offering are determined by securities firm?
maximum amount of bonds to be issued, coupon rate, maturity, other provision, asking price
beta
measure or risk assuming unsystematic diversification
treynor index
measures risk adjusted return when beta is the most appropriate measure of risk
sharpe index
measures risk adjusted return when total variability is the most appropriate measure of risk
Value-At-Risk Method
method that involves determining the largest possible loss that would occur as a result of changes in market prices based on a specified percent confidence level
Balanced Funds
mix of stocks and bonds targeted at retirement
put option in the money when.....
mkt price < exercise price
call option at the money when.....
mkt price = exercise price
put option at the money when.....
mkt price = exercise price
call option out of the money when......
mkt price<exercise price
call option in the money when....
mkt price>exercise price
put option out of the money when......
mkt price>exercise price
Exchange Traded Funds (ETF)
modern variation of closed-end funds price tracks NAV better than traditional closed-end funds
Federal Insurance Office
monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons.
Pipeline risk:
mortgage companies have many committment letters in process of being approved
Mutual Fund Performance
mutual funds generally do not outperform benchmarks
Europeans tyle option:
nice if u r a writer bc u know no one is going to exercise it unexpectedly on u
No load
no service charge
Loan Commitment
obligation by a bank to provide a specified loan amount to a particular firm upon a firm's request
secondary common stock offering
offering previously issued stock
Securities Investor Protection Corporation (SIPC)
offers insurance on cash and securities deposited at brokerage firms and can liquidate failing brokerage firms
Venture Capital Structure
only equity
best effort
only part of issue is bought and investment bank uses expertise to sell
free cash flow method
operating cash flow - expenditures
What are some aspects of security firm advising to corporations?
operation restructuring, ownership restructuring, re issuance of stock, m&a and the financing associated with m&a
for a call option: time value =
option premium - intrinsic value
OIC resources:
optionseducation.org -options calc, strategy guides
What services do securities firms provide?
origination, underwriting, distribution of stock, advising, and private placement of stock
FINRA responsibilities
oversight of NYSE, over 4000 brokerage firms, and 600,000 representatives
Outside Directors
oversight of bank
Instinet (ECN)
owned by NASDAQ
Archipelago (ECN)
owned by NYSE
Collateral requirements on business loans
patents, brand names, licenses and other intangible assets
best way to build a good credit score?
pay on time!!!!
Negotiable Order or Withdrawal (NOW)
pays interest and provides checking services
Sarbanes-Oxley Act
refer to PPT for specifics
American style option:
referes to where it originated
GIC
refers to Guaranteed Investment Certificates. These investment vehicles offer Canadians a safe and effective storage of wealth while paying out an attractive rate of interest.
Market Risk:
refers to fluctuaions in val of instrument as a result of mkt conditions
Interstate Banking Act of 1985
removed interstate branching restrictions and thereby further increased competition among banks for deposits
Gramm-Leach-Bliley Financial Services Modernization Act of 1999
repealed glass-steagal act; pushed for consolidation of financial institutions
Title Loan Centers
replacement for many payday loan centers; they use auto title as collateral
Equity security
represents an ownership interest in a corporation
Regulation Fair Disclosure (Reg FD) of 2000
required public companies to disclose any significant information simultaneously to all market participants, not just wall street analysts
The Community Reinvestment Act of 1977
requires banks to meet credit needs of qualified borrowers in the community, even those with low or moderate incomes
Sales of Mortgage Backed Securities Reform
requires that savings institutions and other financial institutions that sell mortgage backed securities to retain 5% of the portfolio unless the portfolio meets specific standards that reflect low risk
Division of Market Regulation at SEC
requires the orderly disclosure of securities trades
Exchange Rate risk mitigation
requiring borrower to repay loan in the currency denominating the loan
loan loss provision
reserve account established by the bank in anticipation of loan losses in the future
Common stockholders are the owners of a
residual (right to income, assets, and liabilities)
Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act)
resulted in creation of more financial conglomerates that include securities firms
John "Jack" Bogle
retired CEO of Vanguard
Division of Corporate Finance at SEC
reviews the registration statement filed when a firm goes public, corporate filings for annual and quarterly reports, and proxy statements
call option:
right to buy underlying fin instrument at exercise price w/in spec period of time
Put option:
right to sell underlying fin instru at exercise price w/in spec period of time
Credit (default) risk
risk that a firm will default on payment of interest or principal of a debt
Hedge Funds
risky investments only for high net worth investors; they use leverage, short selling, arbitrage, etc; cater to "sophisticated investors"
Investment Company Act of 1940
rule basically states that the offering price for mutual funds be upheld for all buyer
non interest expenses
salaries, equipment, etc
comercial mortgages are bigger and can be......
securitized as 1 loan, is strange. this is strange but no unheard of. it is mroe common for there to be mulitple borrowers in a pool.
Life insurance company
sell policies to protect households against a loss of earnings from disability, retirement, or death of the insured person
Home Owners Loan Act of 1933
was an Act of Congress of the United States passed as part of Franklin Delano Roosevelt's New Deal during the Great Depression to help those in danger of losing their homes. The act, which went into effect on June 13, 1933, provided mortgage assistance to homeowners or would-be homeowners by providing them money or refinancing mortgages.
Fiduciary standard
was established as part of the Investment Advisors Act of 1940. They can be regulated by the SEC or state securities regulators, both of which hold advisors to a _______ standard that requires them to put their client's interests above their own.
expected portfolio return
weighted average of individual asset returns
portfolio beta
weighted average of individual security betas
Discount Window
when banks borrow funds from federal reserve
Illiquidity
when cash outflows exceed inflows
When to invest funds?
when stock prices are low
Private Equity % acquired
100% in leveraged buyout
Financial intermediary
Companies that facilitate the financial transaction between investors and firms.
NASDAQ
Competitive dealer, quote based system - Computer network based. No true physical location for trading - Once considered an OTC market. Now an exchange
Variation margin:
-amount necessary to being equity account back to intial margin level
Reserve bank
12 reserve banks, "bankers bank", bank for government, clearing house, supervise member banks.
Which Dodd-Frank reform covers fees?
12b-1
ERISA
*The Employment Retirement Income Security Act of 1974 (ERISA) tries to check abuses and to protect employees' expectation that promised pension benefits will be paid.
Structure of the SEC
- 5 commissioners ( appointed by pres) - 5 year terms
Types of options:
-american style -european style -bermuda style -exchange traded (vanilla) -OTC option (exotic)
the cash exchange rate:
-american terms: us dollar per unit of foreign currecny -european terms: foreign currency per unit of US dollar
Day traders vs position traders
"Speculators" in financial futures markets take positions to profit from expected changes in the futures prices. Day traders attempt to capitalize on price movements during a single day. Position traders maintain their futures positions for longer periods of time. "Hedgers" take positions in financial futures to reduce their exposure to future movements in interest rates or stock prices.
Credit Unions distribute
"dividends" rather than interest
Private Equity Size
$100 mil - $10 bil
S&L FDIC Insurance
$250,000 per individual
Net Asset Value
(Market Value of portfolio - liabilities)/number of shares outstanding
SIPC insurance limit
$500,000 including $100,000 against claims on cash
GAAP
(Generally Accepted Accounting Principles) Common set of standards that the accounting profession has developed and generally accepted and universally practiced.
Net Interest Margin
(Interest Revenues - Interest Expenses)/Assets
Asset
(n.) something of value; a resource; an advantage
diff btwn options and futures
- Both parties to a futures contract accept an obligation to transact, while only the option writer has such an obligation. - The option buyer has a limited, known, maximum loss. The same cannot be said of a futures contract. - The risk/return profile of an option is asymmetric, while that of a futures position is symmetric.
options as executive compensation:
- Executive options have little in common with options that trade in financial markets. - Many option compensation programs do not account for general market conditions. - Executives with substantial options may be tempted to manipulate the stock's price upward in the short term, even though doing so adversely affects the stock price in the long term. - You do not always have to be a top executive to be eligible for stock options, depending on the employer.
Electronic Communications Networks (ECN's)
- Privately owned. - Trade listed stocks off the exchanges
i rate swaps basis risk:
- The interest rate of the index used for an interest rate swap will not necessarily move perfectly in tandem with the floating-rate instruments of the parties involved in the swap. - When this happens, the higher payments received do not offset the increase in the cost of funds. - Basis risk prevents the interest rate swap from completely eliminating the financial institutions exposure to interest rate risk.
Mortgage credit crisis:
- i rates increased in 2006 which made it more difficult for existing homwoenwe w adj rate morts to make their monthly pmts -low intial "teaser rates" were expiring and these homeowners also faced higher mort pmts -by june 2008, 9% of all US homeowners were behind on their mort pmts or in foreclosure
history of futures exchange contracts etc:
- it was all agricultural from mid 1800s - 1960s. 1968 started trading frozen chicken (innovation of that time period). - 1969 other things started to happen—plywood futures, silver futures, CBOT allowed the first women members in-no women prior to this. - 1975 CBO released the ginnie mae contracts (first housing futures contracts)--> by 1981 the largest traded fin futures was t-bonds
option cycle:
- january expires: jan, april, july, oct -feb expires: feb, may, aug, nov -march expires: march, june, sept, dec
Downside of algorithmic trading?
- less trading jobs - flash crash
Bretton woods:
-1944-71: the exchange rate was maintained by govts within 1 % of a specified rate. US dollar key. -worked well for awhile but then US became more defecit spendin and trade imbalances, so by 71 when they tried to reset it w smithsonian agreement it didnt really work
Smithsonian agreement :
-1971 -allowed for devaluation of the U.S. dollar and called for a widening of boundaries from 1 to 2 ¼ percent.
Floating exchange rates:
-1973 -currencies began trading freely and no longer pegged by anything like the US dollar. - Dirty float: exchange rates are market determined but subject to some government intervention. - Freely floating system: foreign exchange market is totally free from government intervention.
Eurozone Arrangement:
-1999, the euro replaed 11 natnl currencies in europe, and even mroe now. -those who participate in euro make up the eurozone -transactions btwn them dont requre and exchange of currencies; shared monetary policy
Credit default swaps:
-A privately negotiated contract that protects investors against the risk of default on particular debt securities. -The main participants in the CDS market are commercial banks, insurance companies, hedge funds, and securities firms. -One party is the buyer, who is willing to provide periodic (usually quarterly) payments to the other party, the seller - seller receives the payments from the buyer but is obligated to reimburse the buyer if the securities specified in the swap agreement default ("credit event") -The buyer of a CDS is protected if the securities specified in the CDS contract default.
CDS background:
-CDS created in 1990s as a way to protect bondholders from default risk -overtime were adapted to protect inv tht purch MBS -as housing mkt weakend in 06, inv purch CDS as protection againts MBS defaults
How do banks measure credit risk?
-Determining collateral -Determining Loan Rate -Measuring Credit Risk of a bank portfolio
Impact of credit crisis on CDS:
-Financial institutions that anticipated a major decline in housing prices purchased CDS contracts on MBS even when they had no exposure to MBS -During the credit crisis, many MBS defaulted; this generated large profits for the buyers of CDS contracts and major losses for the sellers.
Benefit of futures options:
-Futures options on Treasury coupon futures do not require payment of accrued interest (you would have to pay accrued interest if option was on the actual Treasury security.) -believed to b cleaner tbc reduced liklihood of delivery squeezes (no chance the bond will b in short supply on delivery) -to price any option, u need to kno price of underlying asset at all times (some bond prices r not avail at all times)
Mortgage-Backed Securities (MBS):
-GNMA ginnie mae MBS -private label pass-thru securities -FNMA fannie mae MBS -FHMLC freddie mac participation certificates -collateralized mort obligations (CMOs) ***all of these are pass-throughs: collect i from i and principcal, hand them to investors, where CMos do diff things
role of clearinghouse w futures:
-Guarantees that both parties to futures contracts satisfy their obligations (counter party risk) - Simplifies the unwinding of futures positions prior to the settlement date. -OTC had trouble in the fin crisis w derivs, but exchanges didnt bc of the clearinghouses
amortizing vs non amortizing assets:
-amortizing, a self liquidating structure tpically securitized over the life of the asset -nonamortizing, a revolving structure whereby all principal recieved is used to create new collateral
Technical forecasting:
-Involves the use of historical exchange rate data to predict future values. - A computer program can be developed to detect particular historical trends. - There are also several time-series models that examine moving averages and thus allow a forecaster to identify patterns, such as currency tending to decline in value after a rise in moving average over three consecutive periods. -in the ST things r harder to forecast
CDS related failures:
-Lehman Borthers failure--didnt cover all CDS obligations; ppl saw that the govt wont automatically rescur all large fin inst -AIG: fed injected billions into AIG, a large CDS issuer, bc it feared mjr damage to fin sector
systemic risk:
-The intertwined relationships among firms may cause one trader's financial problems to be passed on to other traders. -The credit crisis demonstrated that some financial institutions had high exposure to risk because their derivative security positions were intended to enhance profits rather than to hedge portfolio risk. -Dodd-Frank created the Financial Stability Oversight Council, which is responsible for identifying risks to financial stability in the U.S. and making regulatory recommendations to reduce risks to the financial system. -Increased use of clearinghouses in OTC derivatives post financial crisis.
Securitization Process:
-a sec firm or comm bank combine individ morts into packages -the issuer of the MBS assigns a trustee to hold them as collateral for the inv who purch the sec -after theyre sold the co who issued the MBS recieve the i and principal pmts on the morts and then transfer (pass thru) the pmts to investors tht purch the sec
Currency Swaps:
-agreement tht allows one currenct to be periodically swapped for another at spef xchange rates -commercial banks facilitate by findinf parties w opposite needs -allows hedging of long-dated foreign exchange risk
Private mortgage insurers:
-allows borrowers to get mort w/o 20% down pmt -borrowers by law can request cancellation of PMI when loan balance reduced to a certiain level. lnder by law should cancel when loan bal is 78% of orig appraised value r sales price, whichever is less.
Motivation for ABS:
-alterantive means to raise funds -lower funding costs -collateralized security -separation of pool of assets from the issuer -special purpose vehicle (can actually have a higer credit rating than the co issuing due to the quality of collateral and credit enhancement) -might be cheaper than other alternatives -may also separate those assets from the rest of ur business
roles of futures contracts in fin mkts:
-altering risk exposure -price discovery -arbitrage -increased volatility of underlying asset -underlying mkt might b a little more volatile than it was b4 futures
CDS reform:
-as a result of dodd-frank, many OTC derivative sec are traded thru clearinghouses -should become more standardized -pricing should b mroe transparent -standardixzed contracts should increase th trading volume -mkt participants & regs shud b more informed abt the use of certain swap contracts if theyre traded on an exchange
foreign exchange risk:
-asset exposure -liability exposure -revenute & costs
Principle of convergence:
-at delivery date the futures price must equal the cash price -as deliv date approaches, the futures price converges toward the cash price -the diff btwn the futures price and the cash price is "the basis"
Private label pass through securities:
-backed by conventional rather than fha or va morts. -insured thru privat inur cos
Lehman Brothers case
-bad investments in mortgage backed securities and heavy reliance on borrowed funds -bankruptcy in sept. 2008
fundamental forecasting:
-based on fundamental relationships btem exo variables and exchange rates (Inflation differentials, Interest rate differentials, Cross border capital flows, Fiscal & monetary policy, Government intervention) -Given current values of these variables along with their historical impact on a currency's value, corporations can develop exchange rate projections.
basis risk:
-basis is diff btwn cash price and futures price -basis riskthat the position being hedged by the futures contracts is not affected in the same manner as the instrument underlying the futures contract -applies only to firms or individs who r using futures contracts to hedge
risk of i rate swaps:
-basis risk -credit risk -soveregin risk
Trumps effect on real estate:
-big banks have pulled out of the market; CFPB person in place until 2018 so things will stay the same until then -sharp jump in mort rates bc of some bond thing
option pricing models:
-black & scholes option pricing model -binomial option pricing model
scholes
-black & scholes option pricing model -was on board of LT capitla mgmt
Credit enhancement:
-bond insurance (most common) -senior/subordinate debt structure -overcollaterlization -reverse funds -CF waterfall
fully amortized loans:
-both fixed and adj morts can be this -means that pmts are sufficient not only to pay i on the loan, but to fully pay the principal amt by the last pmt date
Other asset backed securities (ABS):
-cc recievables -auto laons -home equity loans -manufactured housing loans -student loans -small business admin loans -bond obliations -home rental
Currency futures:
-centralized trading on exchanges -quan and deliv dates standardized -usually dont result in actual delivery or sale of the currency -act as secondary market -standardized makes for easy trading -may be used for hedging
Factors affecting Commercial Bank cash flows
-change in economic growth -change in risk-free interest rate -change in industry conditions -change in management abilities
Factors affecting the Required Rate of Return
-change in risk free rate; direct proportionality exists -change in risk premium
originators sale of mortgages:
-conforming morts meet agency underwiriting standards (max PTI, max LTV, max loan amt) -nonconforming morts dont meet agency underwiriting standards (can still be held in issuers portfolio, cans till be securtiized)
extendable swaps:
-contains a feature that allows the fixed for floating party to extend the swap period -the terms of an extendable swap reflect a price paid for the extendability feature
investor risk of pass throughs:
-contraction risk: when mort rates decline, prepaments speed up -extension risk: when mort rated increase, prepmts slow down ****the opposite of what investors want!!!
swap background:
-facilitated by OTC rather than organized exchange -i rate swaps became pop in 80s when corps were experiencing large fluctuations in i rates -fin inst in the US w more i rate sens liabilites than assets were adversley affected by increasing i rates -fin institutions in eurp had more access to LT fixed rt funding and used the funds for floating rate loans and were adversely affected by declining i rates -i rate swaps allowed both types of fin insts to reduce exposure to i rate risk
FHLMC (Freddie Mac) Participation Certificates:
-fed home loan mort assc, chartered as a corp in 1970 to ensure that suffiecient funds flow into the mort mkt -sells particiaption certs ans uses proceeds to fin the organicaiton of conventional morts from fin isntitutions -fannie mae and freddie mac enhance liquidity in the mort mkt
Advantages of Captive Finance Subsidiary
-finance distributor or dealer inventories until a sale occurs -effective marketing tool by providing retail financing -allows a corporation to separate its manufacturing and retailing activities from its financing activities
defined futures contract:
-firm legal agreement btwn a buyer and a seller (buyer agres to take deliver of an asset at a spec price and time; seller agrees to make deliv of asst at spec price and time) -an obligation for both
plain vanilla swaps:
-fixed for floating swap -fixed rate pmts are periodically excnahged for floating rate pmts
Daily settlement:
-futures contracts marked to market in a daily basis -a buyer realizes a profit if the price increased; or a loss if decreased (swith for seller) -daily price limits restrict the maximum daily price moves -800 points down for the dow
key elements of futures concepts:
-futures price -settlemetn date or delivery date (date u take or make delivery) -underlying asset(specific grade, quan, etc)
Issuers of commercial mortgage backed securities:
-ginnie mae -fannie mae -freddie mac -private entities (most prevalent) -loan pools (single borrower or multiple-most prev is multi)
puttable swaps:
-gives party making floating rt pmts right to termiate the swap -allows inst to termiate the swap if i rates rise
Futures options (aka options of futures):
-gives the buyer the right to acquire a position in a futures contract -long position in a call option -short position in the case of a put option -futures options are the option of hoice in many fixed income mkts
callable swaps:
-gives the party making the fixed pmts the right to terminate the swap prior to its matiruty -allows teh fixed rate payer to avoid exchanging future i pmts if it desires
futures vs forwad contracts:
-main diff: trading location--there is no xchange for forwards. -interact w bank or some fin inst; no clearinghosue gaurantee the trading, issue of deliv and selltlemtne (fwd results in actual delivery & futures usually dont) -currencies forawrds are still relevant; otc, individually negotiated, not standardidez -collateral -credit risk
is it a good career choice in az (to b a mort broker)?
-make a bunch of money until u dont -very cyclical -business good when were confident, w falling i rates, ppl buyin and selling homes (v strong envi) -the reverse environment: not confident, rising i rates so no one can refi their morts, less likely to sell, mort business gets v slow
settlement dates:
-march, june, september, december -nearby futures contracts -most distant futures contracts
initial margin:
-min dollar amt req per futures contract -provides investor w substantial leverage
maintenance margin:
-min level to which an equity position may fall due to adverse price movements
fixed vs floating rate
-mismatch issues if collateral and asset backed security arent both fixed or floating rate -typically solved by use of derivatives
risks of trading futures contracts:
-mkt risk -basis risk -liquididty risk -credit risk -prepmt risk -operational risk -systemic risk
CF characterisitcs of pass thru securities:
-monthly mort pmts (i and principal repayment) -mgnitude of monthly mort pmts is greater than pmt for pass thru securities (servicing and other fees) -timing of monthly mort pmts ad pmts to investors isnt identical (slight lag)
nonconforming mortgage example:
-mort and hosue is too big so must go thru a private securitization (a jumbo mortgage) -can cost more or less than conforming ones, would relate directly to those characteristics
Collateralized mort obligations (CMOs):
-morts segments into tranches (classes) accrding to their maturity and CF provided by each tranch are usualy struct in a sequential manner -any repaid principal is initially sent to owners of the 1st tranche until the total pricipal amt is fully repaid. then pricipal is paid to the 2nd tranche. this continues until principal pmts r made to owners of the last trance. -they usually have 3 to 10 tranches -soemtimes segmened into interest only and prinicpal only tranches -some morts are also sold thru a collateralized debt obligation (CDO) which is a package of debt securities backed by collateral that is sold to investors
is paying off ur mortgage a good goal?
-most ppl view it today as an investment and the mort pmts as a taxable deduction on ur income taxes (u deduct interest u pay and property taxes). -most ppl greatly overestimate the benefit of the deduction--unless ur mortgage is huge ur really not getting that much of a benefit
commercial mort property types:
-mutlifam props -apartment bldgs -office bldgs -industrial props -shopping centers -hotels -health care facilities
i rate swap provisions:
-notional principal val to whicht he i rates are applied to determine the i pmts involved -fixed interest rate -formula and type of index used to determine the floating rate -frequency of pmts -lifetime of the swap
Bear Stearns case
-occured in 2008 -major losses from investing in mortgage backed securities -relied heavily on borrowed funds thinking that gains would recover interest -declared bankruptcy
Societe Generale
-occurred in 2008 -$7.2 billion losses -29 yo Jerome Kerviel -circumvented company's computerized controls on the size of positions he could take on european stock indices -5 year prison sentence
Interest rate Floors:
-offers pmts in pds when a spec i rate index falls below a spef floor rate -pmts based on amt the i rate falls below floor rate mulitplied by the notional principal specf in the agreement -buyer will get pmts when i rates decline below the floor -seller gets a fee and is oblogated to provide periodic pmts when i rate falls below the floor rate spec in agreement
Interest Rate Caps:
-offers pmts in periods when a specifiec i rate index exceeds a specific cieling i rate -the pmts r based on amt by which the i rate exceeds the cieling, multiplied as usual by the notional principal specified in the agreement -buyer of a cap is a fin inst that would b adversley affected by rising i rates -seller of a cap gets the fee and is obligated to provide pmts when rates exceed the cieling rate
Currency options:
-organized exchanges (vanilla): many currencies avail, right when u purch call or put, stand contracts, active 2ndary mkt -OTC exotics: customized contracts
types of i rate swaps:
-plain vanilla (fixed for floating) -forward -callable -puttable -extendable -zerocouponforfloating -rate capped -equity -other ypes (using swaps to accomodate fin prefs, tax adv swaps)
commercial mortgages call protection:
-prepmt lockout (like u cannot pay out within first 5 years) - yield maintenance change (calculated based on current i rates; if u try to save all this money and refi then the charge from old lender will make it so refi doesnt make sense to do) -prepayment penalty points
Credit classifications:
-prime (best) -subprime (not so good) -alt-A (in the middle between the two)
why trade financial futures?
-speculatores take prostios to profit from expechted changes in futures prices -day traders attempt to capitalize on price mvmts durig a single day -position traders maintain futures positions for longer pds of time -hedgers take positions to reduce their exposure to future mvmts in i rates or stock prices -spec and hedgers help to make mkt complete. cant have 1 or the other
Prepayment conventions:
-speed -conditional prepayment rates (CPR): assumed fractional prepmt on remaining mort balances; single monthly mortality rate converts annual CPR to monthly -PSA benchmark (50%= 1/2 the PSA rate; 300% = 3x psa rate) -average life (avg time to recepits of principal pmts, weightd by the amt of prinicipal expected; depends on PSA assumptions) ******easy to pay too much if u dont understand the mkt
liquidating a futures position:
-take an ofsetting position b4 delivery date -take or make delivery of asset on settlement date
Currency forecasting techniques:
-technical -fundamental -market-based -mixed -evidence says this is soemthing kind of forecastable
options contracts:
-the RIGHT to buy (call) or sell (put) a spec amt of a spec asset at a spec price w/in a specif time period
Foreign exchange rates:
-the amt of one currency that can b exchanged for a unit of another -aka Forex or even FX
Spot market
-the cash exchange rate -Foreign exchange rates fluctuate freely among most major currencies. - Foreign exchange rates often fixed (pegged) or controlled by governments of minor currencies.
FNMA (fannie mae) MBS:
-the fed natnl mort assc created in 1938 to develop a more liquid secondary mkt for morts -channels funds from instntl investors to financil instns tht desire to sell their morts
zero-coupon-for-floating swaps:
-the fixed rate payer makes a single pmt at the maturity date of the swap agreement, the floating rate payer makes periodic pmts throught the swap period
exchange trading of futures contracts:
-the pit: where u can ee each other elevated -hand signals: palm out is selling, palm in is buying -jackets: indicateswho u r working for & who u r; used to have to wear a coat and tie on xchange floor except during summer. light ajckets w patches let to weird ones now
Operational risk:
-the risk of losses as a result of inadequate mgmt or controls
Impact of credit crisis on fannie and freddie:
-they inv heavily in subprime morts that required homeowners to pay higher i rates -by 2008, many subprime morts defaulter so they were left w collateral that had a mkt val much below the amt owned on the morts they held -fundign probs (couldnt raise capital, stock values declinedby more than 90% from prevous year)
who r the principal mort originators?
-thrifts -commercial banks -mort banks
Characteristics of ETFs
-traded on exchanges -tied to an index -low expenses -tax efficient -continuous pricing -brokerage commission paid -NAV tracked closely
Difference between CMBS and nonagency RMBS:
-transition structures are the same except: -prepayment terms for com morts differ significantly -role of servicer in the event of default differs significantly -in CMBS, jr class of bond buyers typically sought beofre the deal is structured -servicer in a CM pool is more like a negotiaor
credit gaurantees:
-us govt mort insurers -private mort insurers
option terminology:
-writer/ seller -buyer/ holder -option premium / option price -exercise price/ strike price -expiration date/ maturity date -underlying asset
do credit (FICO) scores matter?
-yes, determines if u get the mort and what the i rate is if u do get the mort
Yields on MBS:
-yields are largely a function of prepmt risk -yield calc requires (determination of CF, projetions of prepmt) -the public secutieis assoc convention is used (assumes low prepmt rates in newly created morts; assumes prepmt rates speed up as morts become seasoned)
Reserve
...
NET ASSET VALUE
..., Calculated by subtracting fund liabilities from fund assets. The net asset value is further defined by dividing the net value of the fund by the number of shares outstanding to equal the net value per share. See also Bid Price.
how many votes to common stock holders get?
1 vote concerning key matters
What are the 4 things that an investor communicates to a broker to place an order?
1) The name of the stock 2) to buy or sell 3) number of shares to buy or sell 4) is the order a market or limit order
Methods used to assess interest rate risk
1. Gap Analysis 2. Duration Measurement 3. Regression Analysis
used to have to put ____ down for a mort?
10%. Art's rate was 11% and he was delighted w that.
What is classified as a block trade?
10,000 shares of stock or $200,000 worth of bonds
Functions of investment bankers
1. advising issuer on IPO terms and timing 2. underwriting and security buying 3. security distribution
Advantages of Private Stock Exchange
1. allows owners to obtain cash 2. lower price than ipo
Public Offering Feasibility
1. at least $50 million in stock 2. large enough shareholder base
Why do private firms go public?
1. financing to support firm growth 2. "cash out" by selling original equity
CAPM Assumptions
1. investors are risk adverse 2. all investors have common time horizon 3. all investors have same expectations about future security returns 4. capital markets are perfect
How do banks reduce interest rate risk?
1. maturity matching 2. floating rate loans 3. interest rate futures contracts 4. interest rate swaps 5. interest rate caps
Disadvantages of Private Stock Exchanges
1. need proof of income of investors 2. limited info available 3. limited trading volume
How can banks increase their capital?
1. retaining earnings or issuing new stock 2. reducing dividends 3. selling assets
CAPM Criticisms
1. return distributions are not perfectly normal 2. systematic errors in pricing due to heuristics
beta of all securities in market
1.0
Hedge Fund SEC registration exemption
15 or less clients
when was Securities Act created?
1933
average first day return of IPO
20% over last 30 years
Taper tantrum:
3 yrs ago janet yellen insinuated we would regularly be raising rates (never happened)
How many Arizonans used non-banking borrowings in the past five years?
36%
Venture Capital Exit Period
4-7 years
how fannie and freddie enhance liquidity in the mort mkt:
9.2 slide 6
Venture Capital Size
<$10 mil
below average risk beta
<1.0
Venture Capital % acquired
<50%; minority
above average risk beta
>1.0
Fractional reserve banking system
A banking system that keeps only a fraction of funds on hand and lends out the remainder
Portfolio
A collection of all the securities held by an investor
Stagflation
A combination of inflation and recession, usually resulting from a supply shock.
Investment advisor
A financial intermediary who assists investors, particularly institutions, with investments in private equity and other financial assets. Advisors assess potential new private equity funds for their clients and monitor the progress f existing investments. In some cases, they pool their investors' capital in funds of funds.
Primary market
A financial market in which new issues of a security are sold to initial buyers.
Order driven
A dealer based market; Only "natural" buyers and sellers; more investor decisions
Savings & Loan Association
A depository institution that has traditionally obtained most of its funds by accepting savings deposits, which have been used primarily to make mortgage loans. Also known as a thrift.
What is a futures contract?
A derivative
National Credit Union Share Insurance Fund (NCUSIF)
A finance institution that is a participant of the National Credit Union Administration (NCUA) program. Most NCUA insured institutions are federal and state chartered credit unions and savings banks. Accounts at NCUA-insured institutions are usually insured through the National Credit Union Share Insurance Fund (NCUSIF).
Credit union
A financial institution owned by its members that provides savings and checking accounts and other services to its membership at low fees.
What is an OTC futures contract?
A forward. More risk because no clearinghouse
Board of directors
A group of people elected by the stockholders of a corporation to set the policies for the corporation.
Plan sponsor
A group paying the costs for a health benefit plan. This group is typically the employer such as a company, or employee group such as a union. Other groups may include a joint employee management group such as a health care plan for public service employees
Chairmanship of Fed
A highly visible and influential position in the world economy. This position is held by one of the governors and is appointed by the president.
Variable life
A life insurance policy where the insured determines how to invest the dollars that accumulate in cash value
Whole life
A life insurance policy where the premium remains constant and builds a cash value invested by the insurer; a more expensive policy than term
Universal life
A life insurance policyowner has the flexibilty to increase the amount of premium and then decrease it at a later date. The person is also allowed to skip premium payments, provided that there is enough cash value in the policy to cover the premium amount. What type of policy is this?
Odd lot
A lot consisting of fewer than 100 shares or a lot that cannot be evenly divided by 100
Secondary market
A market for existing financial securities that are currently traded among investors
Liquidity
A measure of the ease with which an asset can be converted into money without a significant loss of value.
M1
A measure of the money supply that includes cash, demand deposits, and traveler's checks
National Association of Insurance Commissioners (NAIC)
A nationwide organization whose main responsibility is to protect the interests of insurance consumers. Some of the main objectives of the ____ are to provide support to insurance regulators across the country by promoting competitive markets, the improvement of insurance regulations and equitable treatment of insurance consumers.
Equity (residual)
Obligates the issuer of the financial asset to pay the holder an amount based on earnings, if any, after holders of debt instruments have been paid. Common stock is an example.
Money/investment managers
Obtain their income from managing pension assets by charging a fee.
Gramm-Leach-Bliley
A regulation that Congress passed on November 12, 1999, which attempts to update and modernize the financial industry. The main function of the Act was to repeal the Glass-Steagall Act that said banks and other financial institutions were not allowed to offer financial services, like investments and insurance-related services, as part of normal operations.
Use of derivs:
ISDA survey results: -94% of worls largest corps use derivs to hedge risks -93.6% hedge forex, 88.3% hedge i rates, 50.9% hedge commodities -all industries hedge w fin leading the way at 98.4% and services in last at 84.4%
Load
A sales charge or commission charged to an investor when buying or redeeming shares in a mutual fund.
ETF
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
Money market
A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. Used by participants as a means for borrowing and lending in the short term, from several days to just under a year. securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).
2 ways to Evaluating credit risk
Payment-to-income ratio. Loan-to-value ratio. (size of loan / value of property)
Board of Governors
A seven-member committee that controls the Federal Reserve System. Also called the Federal Reserve Board, or the Fed.
Spread income
A spread between the assets an institution invests in (loans and securities) and the cost of its funds (deposits and other sources)
Arbitrage
A technique employed to take advantage of differences in prices across markets. Arbitrage may also involve the purchase of rights to subscribe to a security, or a convertible security, and the sale or about the same time of the security underlying the rights or convertible security
Futures market
A term for the portion of securities markets in market in which contracts are entered that arrange for the purchase or sale of financial securities, but the exchange of securities for case occurs up to several months later.
Monetarism
A theory that government should control the money supply to encourage economic growth and restrain inflation.
Mutual insurance company
A type of insurance company owned by its policyholders.
401(k) plan
A type of qualified retirement plan in which employees make pretax contributions into an employee trust. In many cases, the employer will match employee contributions up to specific levels
Pension plan
A type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee's future benefit.
Captive Finance Subsidiary
A wholly owned subsidiary whose primary purpose is to finance sales of the parent company's products and services, provide wholesale financing to distributors of the parent company's products, and purchase receivables of the parent company.
Roth IRA
Account providing tax-free income growth; contributions are made with after-tax dollars.
Pension Protection Act of 2006
Act that changes the laws that affect defined benefit plans, defined contribution plans, individual retirement accounts, and other issues related to retirement planning.
What is usually lower, adjustable rate or fixed rate?
Adjustable is usually lower
Interest Rate Caps
Agreements (for a fee) to receive payments when the interest rate of a particular security or index rises above a specified level during a specified time period. During periods of rising interest rates, the cap can provide compensation that can offset the reduction in spread during such periods.
M3
All of M1 + M2 + large denomination time deposits and large-denomination repurchase agreements.
Demand deposit
Also known as a checking account because owner can demand funds at any time without notice.
Role of futures contracts in financial markets
Altering risk exposure. Price discovery. Arbitrage. Increased volatility of the underlying asset? (yes but its usually not a ton)
Premiums
Amount you pay monthly, quarterly, semiannually or annually to purchase different types of insurance.
Glass-Steagall
An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment banking business. The Act was passed as an emergency measure to counter the failure of almost 5,000 banks during the Great Depression.
Level load
An annual charge deducted from an investor's mutual fund assets to pay for distribution and marketing costs for as long as the investor holds the fund. For the most part, this fee is paid to intermediaries for selling a fund's shares to the retail public. Also known as a "12b-1 fee"
Stock exchanges
An exchange is a market where intermediaries meet to execute trades
Stock insurance company
An incorporated insurance company with capital divided into shares and owned by the shareholders. Stock companies issue "non-participating" policies, in that dividends (if declared) are payable to the stockholders rather than to the policyholders, and are taxable.
Central bank
An institution designed to oversee the banking system and regulate the quantity of money in the economy
Unit trust
An investment company that offers a fixed, unmanaged portfolio, generally of stocks and bonds, as redeemable "units" to investors for a specific period of time. It is designed to provide capital appreciation and/or dividend income. Each unit typically costs $1,000 and is sold to investors by brokers. UITs can be resold in the secondary market.
Trading desk
An office at the Federal Reserve Bank of New York charged with implementing monetary policy strategies developed by the FOMC
Derivative
Any financial asset whose value is derivative from the value of some other "underlying" asset.
Example of large branch banking state
Arizona
Why was there a need for swap markets?
Arose in the 80s due to Volcker rising interest rates
Investor risk of pass-throughs
Art isn't thrilled with mortgage pass-throughs because of contraction risk and extension risk As interest rates go down, people start refinancing their mortgage. As the investor, things are bad when consumer confidence is high because prepayment speeds up Extension risk: interest rates rise, investor wants his money back so he can invest in a higher-yield environment, but the people who are paying the mortgage won't pay it off because they don't want to refinance with a higher interest rate Contraction risk When mortgage rates decline, prepayments speed up. Extension risk When mortgage rates increase, prepayments slow down. The opposite of what investors want!!!
PSA - Public Securities Association:
Assumes low prepayment rates in newly created mortgages. Assumes prepayment rates speed up as mortgages become seasoned. PSA tells us that its normal for people to not make extra payments on their loans, but as loans become more seasoned, people will make extra payments or refinance and pay the entire thing off.
What does the PSA tell you?
Assumptions, such as: Prepayment speed PSA % Average life
What is the principle of convergence?
At delivery date, the futures price must equal the cash price. As the delivery date approaches, the futures price converges toward the cash price. The difference between the futures price and the cash price is referred to as "the basis".
Paul Volcker
August 6, 1979 president Jimmy Carter installed Paul Volker at the head of the Federal Reserve. Volker committed the American central bank to do whatever was necessary to bring inflation down, high-interest, low-inflation, policy. He pushed real interest rates up from near or below zero to 10%. This forced companies to economize on other costs, such as labor.
Standby Letters of Credit
Backs a customer's obligation to a third party
Global banking
Banks compete head-to-head with investment banking (or securities) firms and cover a broad range of activities involving corporate financing and capital market products and services.
Money center bank
Banks that raise most of their funds from the domestic and international money markets and rely less on depositors for funds.
Debt instrument
Bonds
What is the law with PMIs Private Mortgage Insurers?
Borrowers by law can request cancellation of PMI when loan balance reduced to a certain level. Lender by law should cancel when loan balance is 78% of original appraised value or sales price, whichever is less.
type i liability
Both the amount and the timing of the liabilities are known with certainty. Ex: A liability requiring a financial institution to pay $50,000 six months from now.
Frictional unemployment
Brief periods of unemployment experienced by people moving between jobs or into the labor market
Suitability standard
Broker-dealers only have to fulfill a suitability obligation, which is defined as making recommendations that are consistent with the best interests of the underlying customer. Broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA) under standards that require them to make suitable recommendations to their clients.
Open market operations
Buying & selling government securities to change the supply of money
Program trades
Buying or selling large baskets of stocks (15 or more stocks with a total value of $1 million or more
Dodd-Frank
Law that calls for fundamental changes in executive compensation disclosure, compensation committee independence, shareholder voting rights, and clawback provisions in publicly traded companies.
Capital market
Market in which money is lent for periods longer than a year
cashflow waterfall:
CF that remain after all schduled obligaions are met is called the excess spread. the excess spread is the first line of defense against collateral losses
who regulates futures contracts?
CFTC
Who regulates futures?
CFTC The Commodity Futures Trading Commission
mkt structure:
CME and CBOT trace history back to 1874 and 1848 CME and CBOT have now merged. cme group dominance in mkt share of the US
Market structure for futures:
CME is the dominant group in the US (combo of the Chicago exchange because futures trading has agricultural origin) 1968 came up with iced broiler (frozen chicken) 1969 plywood futures were invented Silver futures were first precious metals futures CBOT didn't allow women before 1969 CBOT 1975 - true financial futures on MBSs 1981 - treasury futures were most commonly traded futures They still trade with hand signals and use colorful shirts to be able to see each other People here still trade on their own account (would never happen at the NYSE)
What is a SPV (special purpose vehicle)?
Can actually have a higher credit rating than the company issuing due to the quality of collateral & credit enhancement.
Front End Load
Commission paid to sales agent up front; as high as 8.5%; usually 4-6%
What is cash flow waterfall?
Cash flows that remain after all scheduled obligations are met is called the excess spread. The excess spread is the first line of defense against collateral losses.
Arthur Burns
Chairman 1970-78, Economist, Keynesian view of economic theory, inflationary forces grew during tenure.
Who introduced the first mutual fund marketplace?
Charles Schwab in 1992
What are CMOs?
Collateralized Mortgage Obligations: Mortages are divided into tranches. The cash flows create short and long term bonds. Bonds backed by interest, bonds backed by... etc
Spot market
Commodities market in which goods are sold for cash and delivered immediately. Trades that take place in FUTURES CONTRACTS expiring in the current month are also called spot market trades.
Price reporting
Consolidated Tape Association
To place an order to buy or sell a specific stock, an investor does what?
Contacts a brokerage firm
What is conventional mortgage?
Conventional mortgage: no gov backing up if you default. (no gov. guarantee) PMI comes into play. If you don't put 20% down, the lender will make you get insurance to back up if you can't pay your mortgage. This isn't something you're not thrilled about doing.
Notable Failures during Credit Crisis 2008-2009
Countrywide Financial - aggressive subprime mortgage strategy IndyMac - $32 billion portfolio of mortgages Washington Mutual
Which OTC market for futures is the biggest?
Currencies. B/C you're dealing with financial institutions so you're not as worried about them not coming through
Ben Bernanke
Current Chairmen of "The Fed" who was appointed by G.W. Bush, and reappointed early by Obama -He's a conservative economist.
Algorithmic trading
Electronic trading systems that supplement or replace human traders
What is the pension protection act of 2006?
Dealt with underfunding crisis by raising PBGC premiums and tightening standards. Allowed employers to automatically enroll their employees in defined contribution plans. Enabled employers to obtain more investment advice for their employees by removing fiduciary liability. Raised contribution caps so companies could contribute more during prosperous years. Affects employees and people that work in the industry. Allow companies to contribute more to pensions when times are good (because the copanies don't contribute when times are bad) Allows employers, defined contribution plan like a 401K, you are allowed to 'roll your employees' right when they join you (this is significant because many employees don't sign up) (Art thinks that this has been a good thing because more people have gotten in) ***Pension Protectoin Act of '06, it allowed companies to help. This helped employees
Investment company
Defines an Investment Company as any issuer that engages primarily in business of investing, reinvesting or trading securities. If more than 40% of the value of the issuers total assets invested in investment securities.
Specialists on NYSE are now known as what?
Designated Market Makers
Crossing networks
Do not display quotes, but anonymously match orders for institutions
Organization produced committee driven
Dow Jones Industrial Average. Standard & Poor's 500
Reinsurer
During the process of reinsurance an insurance company that has its property risks reinsured by another provider is called
What is ERISA
Employee Retirement Security Act of 1974. This was needed. Many pensions were doing what SS does. Just expensing the business as people retired...there was no 'fund.' Pensions happening under a handshake and then not happening...this would never happen under ERISA. You have to create a real fund and then actually fund it. This made pensions more solid for employees. A board of trustees for a pension, you act as a fiduciary Vested - You get to take the pension contributions with you??? You put limits like must work 5 years you will be fully vested or something like that. Before it was ~40 years. Defined benefit plan is longer but is still shorted than what it used to be. Starbucks - there is no wait time to be vested Pensions are insured by the gov if it fails
Defined contribution plan
Employees and employer pay a specific amount into the plan for each participant. Employer contribution often are based upon a percentage of salary or a percentage of profits.
Private Equity Structure
Equity & Debt financing
Funding liquidity risk
FINANCIAL INSTITUTION unable to obtain funding to obtain cash flow necessary to meet its obligations
Alan Greenspan
Federal Reserve Board chairman whose firm and astute leadership helped American business and industry witness record profits as the twentieth century came to a close.
Pension Benefit Guaranty Corporation
Federal agency that insures the pensions of workers covered by defined benefit pension plans. If a pension plan is underfunded or lacks financial solvency, the agency pays out benefits to affected retirees.
Performance-based fees
Fees specified by a combination of a base fee plus an incentive fee for performance in excess of a benchmark's.
What is the basis?
Few prices going on with futures contracts: -Todays price of corn -The future price of corn in 90 days from now -The basis is the difference between the future price and the current price (the future date will eventually be the same as the current date)
Fiduciary versus suitability standard
Financial advisers regulated by FINRA generally operate under a "suitability" standard when interacting with clients. Financial advisers regulated by the SEC generally operate under a "fiduciary" standard when interacting with clients. Bank trust departments also operate under this standard. President Trump signed an order that temporarily halted an Obama era Department of Labor effort to require a new fiduciary standard for all retirement assets. In May of 2017, the new fiduciary standard for retirement assets was allowed to go forward, with the possibility that it may be changed at a later date.
Closed-End Funds
Fixed # of shares issued at IPO Price determined by supply and demand
What is Ginnie Mae?
For MBS The Government National Mortgage Association (called GNMA, or Ginnie Mae) was created in 1968 as a corporation that is wholly owned by the federal government. Guarantees timely payment of principal and interest to investors who purchase securities backed by FHA and VA mortgages.
Annuity
Form of contract sold by life insurance companies that guarantees a fixed or variable payment to the annuitant at some future time, usually retirement. In a FIXED ANNUITY the amount will ultimately be paid out in regular installments varying only with the payout method elected. In a VARIABLE ANNUITY, the payout is based on a guaranteed number of units; unit values and payments depend on the value of the underlying investments. All earnings in the annuity grow TAX-DEFERRED.
Tick size
From 1/8 to $0.01 in 2001
What was Art's advice with credit cards?
Get one and pay it off on time
Dark Pools
Gives you a protective place so you can't be taken advantage of; Attracted regulatory attention
Money Market Funds
Govt., corporate, NAV usually is $1
Bond Funds
Govt., corporate, both long term and short term
Acceptable collateral for residential mortgages>
Houses, condominiums, cooperatives.
What is the shiller index?
Housing price index for futures
How do you make money off short-selling?
If the price of the stock declines by the time the short-sellers purchase it in the market, the short-sellers earn the difference between the price at which they initially sold the stock and the price they paid to obtain the stock
American vs European options
In America, if you exercise your option, it means you can exercise your option at any time up to the expiration date. The European style option only lets you exercise at the day of maturity European style option is better for you if you are a 'writer'
SEC Oversight of Corporate Disclosure
In October 2000, the SEC issued Regulation Fair Disclosure (FD), which requires firms to disclose relevant information broadly to investors at the same time
Differences between commercial and residential mortgages?
In commercial mortgages, there are many possible protections (often used). -Prepayment lockout. -Prepayment penalty points. -Yield maintenance charge In residential mortgages, prepayment penalties are the only protection (seldom used).
Direct investments
In domestic finance, the purchase or acquisition of a controlling interest or a smaller interest that would still permit active control of the company.
What is "in the money" for a put option?
In the money when market price < exercise price Put Option: right to sell underlying financial instrument at exercise price (or strike price) within a specified period of time.
What is "in the money" for a call option?
In the money when market price > exercise price
Investment income
Includes taxable and tax-exempt interest, dividends, capital gains net income, certain rent and royalty income, and net passive activity income.
Equity Funds
Income & Growth; domestic, international
Discretionary
Income that is left over after a consumer's basic needs have been met
Term life insurance
Insurance that provides financial protection from losses resulting from a death during a definite period, or term.
Property & casualty insurance company
Insures damage to various types of property. Specifically, it is insurance against financial loss caused by damage, destruction, or loss to property as the result of an identifiable event that is sudden, unexpected, or unusual.
What are a few things that kicked off '08 crisis?
Interest rates increased because inflation was picking up. This made people who had adjustable-rate mortgages default Even prime people walked away because mortgage was worth twice as much
Quote driven
Intermediaries provide liquidity; Brokers, specialists, dealers as market makers; more broker decisions
What is ISDA?
International Swaps and derivatives association
What are the two components of a futures price?
Intrinsic: Value of option if exercised immediately Time Value: Amount option price exceeds intrinsic
margin account
Investors account with broker
Short Selling
Investors place an order to sell a stock that they do not own. The investor borrows the stock from another investor and will return it to the investor from whom they borrowed it
Margin Trading
Investors use cash along with funds borrowed from their broker to make the purchase
Example of Unit Banking State
Iowa
Stock exchange produced
NYSE index
Conforming vs non conforming mortgages:
It is easiest for them to sell the loans if they are "conforming" so that they can flow right into securities. Jumbo mortgage - loan over the max loan amount. It is non-conforming. Doesn't mean that its bad, but it means there will be a different process for the lender to get it securitized. Nonconforming mortgages do not meet agency underwriting standards. Can still be held in issuer's portfolio. Can still be securitized.
What is the secondary market for open interest like?
It trades better
What did Art say about mortgage life insurance?
It's a good deal if you shop around to get best offer
Institutional banking
Loans to nonfinancial corporations, financial corporations (such as life insurance companies), and government entities (state and local governments in the U.S. and foreign governments) fall into this category.
Whats bigger: monthly mortgage payments or pass through securities
Magnitude of monthly mortgage payments is greater than payment for pass-through securities Servicing and other fees. Timing of monthly mortgage payments and payments to investors not identical. Slight lag.
g. William Miller
March 1978-August 1979; average annual inflation rate during term = 9.1%
Financial market
Markets where financial securities, such as stocks and bonds, are bought and sold
Absolute return
Means that returns are to be evaluated relative to zero- or relative to the riskless rate- and therefore independently of performance in equity markets, debt markets, or any other markets.
Payment mechanisms
Methods for making payments, such as checks, credit cards, debit cards, and electronic transfers of funds, which are provided by certain financial intermediaries.
Operating target
Monetary and financial variables whose changes tend to bring about changes in intermediate targets.
S&L Principle Assets
Mortgages, Mortgage Backed Securities, Government Securities
Arbitrage Pricing Theory
Multifactor model rather than single factor model CAPM. Takes into account: 1. business cycle 2. interest rates 3. investor confidence 4. inflationary expectations
Who regulates Credit Unions?
National Credit Union Administration (NCUA)
Open-end Funds (Mutual Funds)
Net Asset Value = your price NAV determined at close of each trading day create or destroy new shares with demand
What system changed U.S. stock trading?
New National Market System (2007)
BATS (Better Alternative Trading System)
Now one of the world's largest stock exchanges
S&L Principle Liabilities
Passbook savings accounts, time deposits
Mortgage lending
Practice of loaning money that is secured by real estate and real property
Preferred stockholders vs. common shareholders
Preferred stockholders have preference over common shareholders by having the right to fixed dividend and liquidation priority
2 risks in mortgage origination?
Price Risk (Risk of adverse effect on value of pipeline if mortgage rates rise.) Fallout risk Risk that applicants with commitment letters will not close. (this is what happened with Art's daughter)
P/E Ratio
Price per share/earnings per share
IRA vs Roth IRA
Primary is the IRA. The traditional IRA: $5000 investment in it. You get to deduct that $5,000 from your income taxes. Then the money compounds tax free. You then pull the money out and then it is taxed then. Roth IRA: A better choice for young people. No tax shield. But compounds tax free (like traditional). But when you pull the money out, you pay NO taxes (unlike traditional). You don't know where tax rates will be in 40 years, but your tax bracket when you're young is less now than it will be when you retire.
Vesting
Process by which a retirement benefit becomes nonforfeitable.
Underwriting income
Profit generated by an insurer's underwriting activity over a period of time, the difference between premiums collected on insurance policies by the insurer, and expenses incurred and claims paid out.
What is a put option?
Put is the option to sell an asset What good is a contract if you don't even own the stock? Here you're spending $2, and if the stock goes to $50, what good does it do me? If you think its going to go down, then you will profit from it. Protective put is a way to hedge yourself if the stock you buy goes down
Gap
Rate Sensitive Assets - Rate Sensitive Liabilities
Gap Ratio
Rate Sensitive Assets / Rate Sensitive Liabilities
Dodd-Frank Act of 2010
Requires that securities firms and other financial institutions that sell securities through the securitization process retain 5 percent of the portfolio unless the portfolio meets specific standards that reflect low risk. Created the Consumer Financial Protection Bureau to protect consumers. Created the Financial Stability Oversight Council, responsible for identifying risks to financial stability in the United States and makes regulatory recommendations to regulators that could reduce any risks to the financial system. Assigned specific regulators with the authority to determine that any particular securities firm or other financial institution should be liquidated. Required that many derivative securities be traded through a clearinghouse or exchange rather than over the counter. Mandated that financial institutions granting mortgages verify the income, job status, and credit history of mortgage applicants before approving mortgage applications.
Basel III
Response to perception Basel II was overtaken by the GFC; won't go into effect anywhere until 2014, but all G-20 members are committed to implementation. Preserves Basel II sophistication, but raises Tier I and II ratio minimums (to 6% and 8%); tightens capital that counts for Tier I and II; creates leverage ratio; adds liquidity required ratios (high quality assets must equal projected capital outflows in a 30-day crisis); "capital buffers"; and loss-absorption features.
Defined benefit plan
Retirement plan that guarantees a certain payout (defined benefit) at retirement, according to a fixed formula which usually depends on the employee's salary and years of service. Investment risk and portfolio management are entirely under employer's control.
Return on Equity
Return on Assets x Leverage Measure
Financial activity regulation
Rules about traders of securities and trading on financial markets. A prime example of this form of regulation is the set of rules against trading by corporate insiders who are corporate officers and others in positions to know more about a firm's prospects than the general investing public.
who regulates underwriting activities?
SEC
Short hedge vs long hedge?
Short hedge (farmer of corn) Protects against a decline in the cash price of a financial asset or portfolio. Long hedge (Kellogs, buyer of corn) Protects against an increase in the cash price of a financial asset or portfolio. Short - protect a decline in stock market (easiest to think about commodities. A former is worried about the price of corn going down, so he would engage in a "short hedge.") Kellogs is worried about the price of corn going up, so they would use a "long hedge" to protect about an increase in the price of corn
Negotiable CDs
Short-Term deposit certificates with a minimum requirement of $100,000
What are interest rate caps?
Similar to an OTC derivative. Offers payments in periods when a specified interest rate index exceeds a specified ceiling (cap) interest rate. The payments are based on the amount by which the interest rate exceeds the ceiling, multiplied as usual by the notional principal specified in the agreement. The buyer of a cap is a financial institution that would be adversely affected by rising interest rates. The seller of a cap receives the fee and is obligated to provide payments when rates exceed the ceiling rate.
Monetary base
The sum of currency in circulation plus bank reserves (vault cash and reserves with the Fed). It reflects the stock of U.S. securities held by the Fed.
Transaction costs
Some transaction costs are explicit; that is, easily seen. Others are implicit or less easily recognized
Who thinks credit scores are calculated poorly?
Susy Orman and Art
What is a interest rate swap?
Swap interest payment obligations
Depository Trust & Clearing Corporation (DTCC)
T + 2 replacing T + 3 ( settlement dates)
Settlement risk
The risk that one party will fail to deliver the terms of a contract with another party at the time of settlement. It can be the risk associated with default at settlement and any timing differences in settlement between the two parties. This type of risk can lead to principal risk.
most important duty of investment banker
due diligence
How is it that people are able to get loans with very little money down?
The Fed Gov guarantees the mortgage if you don't pay it. This allows people to buy a house with very little money down (0-5%)
FOMC
The Federal Open Market Committee is the most powerful committee of the FED, because it makes the decisions that affect the economy as a whole by manipulating the money supply.
Contracting cost
The cost of writing loan contracts paired with the cost of enforcing the terms of a loan agreement.
single price
dutch auction
Authorized participants
The agent who keeps the price of the ETF equal to (or close to) the portfolio's underlying NAV. Conducts in-kind transfers with the ETF provider and takes advantage of arbitrage situations to converge price.
type ii liability
The amount of cash outlay is known, but the timing of the cash outlay is uncertain. Ex: Life insurance policy
Transaction costs
The costs associated with the time and effort needed to search out, negotiate, and consummate an exchange, The costs associated with the time and effort needed to search out, negotiate, and consummate an exchange
Credit risk
The risk that the issuer of a security may default on interest and/or principal payments and cause investors to lose all or part of their investment
Counterparty risk
The risk that the other party to a transaction will not fulfill their obligations; includes settlement risk and credit risk.
Money supply
The amount of money in a country or economy.
Cash value
The amount of money saved in a whole life policy that the policyholder can take by either borrowing against or cashing in the policy
Mutual Fund Taxation
investor is taxed, not fund
ECB
The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed in Germany in June 1998 and works with the other national banks of each of the EU members to formulate monetary policy that helps maintain price stability in the European Union.
Purchasing power risk
The chance that changing price levels (inflation or deflation) will adversely affect investment returns.
family of funds
a group of funds managed by the same investment company with different objectives
Global Research Analyst Settlement (2002)
analyst rating must divulge any recent investment banking business provided by securities firm that assigned the rating
spread
The difference between the bid and the ask price of a security or asset.
Global Research Analyst Settlement (2002)
analyst's compensation cannot be directly aligned with the amount of business that the analyst brings to securities firm
12b-1 fees
annual fees charged by a mutual fund to pay for marketing and distribution costs
Investment advisory fee
The fee charged by the investment adviser for managing a fund's portfolio. This factors into the expense ratio.
What stage companies do VCs invest in?
early stage companies
Disclosure regulation
The form of regulation that requires issuers of securities to make public a large amount of financial information to actual and potential investors.
What was goal of fannie mae, freddie mac, etc...
The goal of all of them was to get cheaper financing for homes so people could own homes.
Price stability
The goal to control a rapid change in prices, either up or down. Consider the impact of inflation on those living on fixed incomes.
Examples of failed S&L during the crisis
Western Savings & Loan, Merabank FSB in Arizona Lincoln savings and loan in california
DOT system (1976) allowed
electronic orders to go directly to the Specialist
Call option vs put option
buy (call option) or sell (put option) a specified amount of a specific asset at a specified price within a specified time period
Federal funds
The interest rate at which banks make overnight loans to one another
What is the most common type of swap?
The most common type of swap is swapping from a fixed interest rate to a floating interest rate and vice versa. People will want to do this for balance sheet reasons. Both companies will be better off. If there is a 100 basis point difference, one company will get 50 basis points better and the other will get 40 basis points better and the investment bank will get 10 basis points.
Assets under management (AUM)
The market value of assets that an investment company manages on behalf of investors. looked at as a measure of success against the competition and consists of growth/decline due to both capital appreciation/losses and new money inflow/outflow.
Required reserve ratio
The minimum fraction of deposits banks are required by law to keep as reserves
Monetary multiplier
The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans (or buying securities); equal to 1 divided by the reserve requirement.
co-op?
buying shares in a complex which entitiles u to live in a specific unit, and paying a monthly fee (like rent) to live in the unit u own
how do underwriters stabilize stock price after IPO?
by purchasing for-sale shares in secondary market shortly after IPO
Call option
The option to buy shares of stock at a specified time in the future
Demand for money
The relationship between the quantity of money people want to hold and the factors that determine that quantity.
ask quote
quote if the investor wants to buy a stock
What is the gov making money on these days?
The rescue of Fannie Mae and Freddie Mac (treasury received $1 billion preferred stock)
Relative return
The return that an asset achieves over a period of time compared to a benchmark. This is the difference between the absolute return achieved by the asset and the return achieved by the benchmark.
Assumed (actuarial) return on assets
The return the company earns on its pension fund. This offsets some of the pension costs and is the source of a lot the trouble surrounding unfunded pension liabilities. Accounting tries to make the pension costs disappear.
Put option
The right to sell an asset at a specified exercise price on or before a specified expiration date.
Market liquidity risk
The risk that a financial institution is unable to transact in a financial instrument at a price near its market value.
Total reserves
The sum of a bank's deposits in its reserve account at the Fed and its vault cash.
Type iv liability
The timing and amount of the cash outlay are both uncertain. Ex: auto or home insurance policies.
Which charge prevents people from refinancing?
Yield Maintenance Charge
Price discovery
________________________ is the set of institutional market mechanisms by which buyers and sellers arrive at specific prices and other terms of trade
What are passthroughs?
receive the interest paid by the mortgages (the certificates listed on 3 slides before)
Keynesian
Theory based on the principles of John Maynard Keynes, stating that government spending should increase during business slumps and be curbed during booms.
Are futures contract are obligations or not?
They are obligations for both parties to deliver/take delivery of an asset at designated time
McCarran-Ferguson Act of 1945
This act stated that the federal government had the right to regulate the business of insurance, but only to the extent that such business is not regulated by state law.
Time deposit (C.D.)
This has a fixed maturity date and pays either a fixed or floating interest rate.
Why are futures options preferable for fixed income?
Tracks price better. Gives the buyer the right to acquire a position in a futures contract -Long position in the case of a call option. -Short position in the case of a put option.
What were few reasons why MBS failed?
Those who originated the securities and those who owned them were not the same Rating agencies failed
Principal originators of residential mortgage loans
Thrifts. Commercial banks. Mortgage banks. Other private mortgage originators: Life insurance companies. Pension funds.
Leverage Measure
Total Assets/Equity Capital
Contingent deferred sales charge
a 1 to 5 percent charge that shareholders pay when they withdraw their investment from a mutual fund
Borrowed reserves
a bank's borrowings from the Fed
Interest Rate Swap Contracts
Two parties agree to periodically exchange interest payments on a specified notional amount of principal; bank receives transaction fee for its services
Distribution of Bonds
Upon SEC approval of the registration, a prospectus is distributed to all potential purchasers of the bonds and the issue is advertised to the public.
How to banks measure market risk?
Value-At-Risk method
Vanilla vs exotic options
Vanilla = Exchanged Traded Option Exotic = Over the Counter
What are penny stocks?
Very low priced stocks
What caused regulatory restrictions on proprietary trading?
Volcker Rule after the 2008 crisis
When is an adjustable-rate mortgage bad?
When interest rates go up. Happened in 2006 9 percent of all americans were behind on their mortgage payments in '08
futures contract:
a derivative; value of this is dependent on (derived from) the vlaue of an underlying asset
Investment objective
a financial goal used to determine if an investment is appropriate
Asset/liability management
Whenever an investment portfolio utilizes borrowed funds as part of its overall strategy, the issue of asset-liability management arises. This is primarily a problem for banks and large financial institutions that fund their investments with either deposits or borrowed funds. In many cases, the problem is expressed in terms of a maturity mismatch; that is, the institution may be borrowing funds in the short term markets (e.g. by using commercial paper) while using the proceeds from the financing to purchase long-term assets.
Organization produced objective measure
Wilshire 5000 Russell 2000
Margin requirements and danger in futures?
With futures, there is so much leverage that its possible to get in trouble. They "mark to market" on a daily basis. You settle every day and realize your profit or loss. The clearinghouse will say that you need to come up with more money if you're doing badly. They don't want to let it get away from you because you can lose A LOT of money with futures. Initial Margin: minimum amount&gives leverage Maintenance Margin: minimum level equity can fall Variation Margin: Amount necessary to bring account back to initial margin level
Closed end fund
a mutual fund with a fixed number of shares that are issued by an investment company when the fund is first organized
Open end fund
a mutual fund with an unlimited number of shares that are issued and redeemed by an investment company at the investor's request
Mortgage:
a pledge of property to secrure pmt of a debt (prop pledged as collateral is real estate; the debt is the loan)
Savings bank
a publicly held depository institution that competes with other banks for customer deposits
primary charactersitic u had to have in 2005 to get a mortgage?
a pulse.
Individual Retirement Account
a self-funded retirement plan that allows you to contribute a limited yearly sum toward your retirement
Maturity intermediation
ability to make long term loans with short term funds which creates asset liability mismatch and exposes the bank to greater interest rate risk.
distorted financial statements
accountants use their expertise to find loopholes to report exaggerated earnings
Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA)
act by which certain federal requirements would apply to state chartered non member banks
The Banking Act of 1933 (Glass-Steagall)
act that separated banking and securities activities
OTC options:
aka exotic -customizable, do many diff basket things
SEC Rule 415 (1982)
aka shelf registration; allows: some of the securities to sit on the "shelf" and reissued once or twice within the next 2 years
xchaneg traded option:
aka vanilla, is what most ppl want, active 2ndary mkt
autoloans, extra ccs, student loans can all help ur credit score but.....
all of them together will hurt ur score.
U.S. May Day 1975
allowed brokerages to charge varying commission rates. Prior to this change, all brokerages charged the same price for stock trades
Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act)
allows banking, securities activities, and insurance to be consolidated
Floating Rate Loans
allows banks to support long term assets with short term deposits without overly exposing themselves to interest rate risk
Rent to own stores
alternative to borrowing
value at risk
alternative to variance based or beta based portfolio risk measures; estimates largest expected loss to a particular investment position for a specified confidence level
where do u get best excahneg rate when traveling abroad?
an ATM w ur debit card. watch out for foreign transaction fees tho
National Credit Union Administration (NCUA)
an agency that regulates and charters credit unions and insures their deposits through its Nationan Credit Union Fund, Grants federal charters and supervises credit unions across the country. This also insures deposits in all federally charted and many state charted credit unions.
Discount window
an arrangement in which the Federal Reserve stands ready to lend money to banks
Interest Rate Swaps
an arrangement to exchange periodic cash flows on specified interest rates
Open economy
an economy that interacts freely with other economies around the world
Fixed income
an income that does not increase even though prices go up
Global Research Analyst Settlement (2002)
analyst historical ratings made available
Medium of exchange
anything that is used to determine value during the exchange of goods and services.
i rate swap:
arrangement where 1 par exchanges one set of 1 pmts for another
underwriter discount for stocks
as high as 3-6%
Division of Enforcement at SEC
assesses possible violations of the SEC's regulations and can take action against individuals or firms
Target date fund
asset allocation changes as approaches set target retirement date
antitakeover amendments
at least 2/3 shareholders approve takeover
origination fees:
at one point were = to 1% the mort value
National Bank Act of 1863
authorized federal chartering of national banks
What other instruments to securities firm securitize?
automobile loans and credit card receivables
mortgage brokers represent:
banks and lenders--they orig loans on multiple banks they rep and loan goes to whicever bank gives their customer the lowest rate
china is a huge eco pwr but currency isnt big. why?
bc they have many resitrictions. have been lifting some and it is becoming more important, but still have many restrictions
excessive commission abuse
brokers charge excessive commissions when IPO demand is high
laddering
brokers encourage investors to place first-day bids at a higher price than offer price to drive prices upward
Option straregy quick quide online pdf:
bull strategies, u think prices will go up. Look at graphs to explain buying/selling put and call. Know the 4 basic graphs and their info for the tests
Informal Line of Credit
business borrowing with specified amount and duration
SEC Rule 144A (1990)
eliminates 2 year holding period required for private placement higher liquidity so investor attractions
SEC Regulation D Private Placement Guidelines
cannot offer through general advertising or solicitation investors need to be accredited
buying a put option:
ch 14 slide 10; (right to sell something) -do this if u think asset is going down in price
financial asset
claim on the property or income of a borrower
Real Estate Investment Trusts (REITs)
closed-end funds that invests in real estate or mortgages
mortgage service fees:
collecting monthly pmts, handling escrow accts for prop taxes and HO insurance
Depository institutions
commercial banks and thrift institutions; financial institutions that accept deposits from the pubic
types of futures contracts:
commodity, financial (stocks, i rates, currencties); cme group shows all futures
unsystematic risk
company specific risk which is diversifiable
Annual "Expense Ratio"
consists of: -investment advisory fee -distribution fee -custody fee -transfer agent -independent accountants -directors fee
diversification
construction of portfolio assets for which returns are not perfectly positively correlated
Back End Load
contingent deferred sales charge; paid only when you sell the fund; % gradually declines
waiting period
cool off period between initial filing and when registration is effective
strong us dollar article:
dollar became stronger after election, which will make trump's goals harder bc cost of labor is going up, so will cost more ot bring manufacturing back to US
Federal Reserve Act of 1913
created a central banking system
Basel Committee
created in 1974 by the G-10 that makes recommendations regarding banking supervision. Unique multilateral organization because it is mainly an informational body.
Long Term Capital Management
created in 1994 by John Meriwether sophisticated highly leveraged hedge fund strategies rescued by Federal Reserve Bank of NY in 1998
Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act)
created more competitive environment for securities firms
S&L Crisis of 1980s
crisis caused by short term borrowing and long term lending with volatile interest rates fraudulent management activities and high risk strategies in some cases
Gold standard:
dated back to early 1800s to early 1900s. many countries participated in this, v hekoful w trades, and developing confidednce in currencies
Challenge of Arbitrage Pricing Theory
deciding which factors to use or how many factors to consider
Operational risk
decision-making process to systematically evaluate possible courses of action, identify risks and benefits, and determine the best course of action for any given situation.
due diligence
deep underwriter research into the company
Regional bank
depository institution, i.e. a bank, savings and loan, or credit union, which is larger than a community bank, which operates below the state level, but smaller than a money center bank, which operates either nationally or internationally. operates in one region of a country, such as a state or within a group of states.
Credit Union Primary source of funds
deposits
U.K. 1986 "big bang"
deregulation for the securities market in London
fat tail
describes when extreme values occur more frequently than would be predicted under a normal distribution
Statutory surplus
determined by the accounting treatment of assets and liabilities. Insurance companies are required by the National Association of Insurance Commissioners (NAIC) to maintain reserves as a cushion for potential equity and credit losses.
Net Interest Margin (spread)
difference between interest payments received and interest paid
Duration Gap
difference between weighted duration of bank's assets and weighted duration of its liabilities
Best way to build good credit?
diversity of borrowing/credit
art volunteers asa young guy to:
do derivatves or futures bc no on else wanted to and eventually they let him do it
writing a put option (naked):
do this if u think the price will go up ; ch 14 slide 11
post fin crisis the fed govt changed so instead of just paying FHA early on.....
in the mortgage, u have to pay FHA insurance the entire life of the mortgage
Office of the Comptroller of the Currency (OCC)
independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and thrift institutions and the federal branches and agencies of foreign banks in the United States.
tax refund anticipation
instant receipt of an income tax refund
home rental backed security:
instead of a mort backed, some wanted more collateral, there might be more of these going forward
Who invest in private equity funds?
insurance companies and pension funds debt financing is also common
Mutual Fund distributions
interest and dividend income; short and long term capital gains
Prime Rate
interest charged by banks on loans to their most creditworthy customers
Gross Interest Income
interest income generated from all assets; moves with interest rates
Gross Interest Expenses
interest paid on deposits and on other borrowed funds; moves with interest rates
Primary Credit Lending Rate
interest rate federal reserve charges banks
Savings deposit
interest-earning funds that can be withdrawn at any time without payment of a penalty
what is the ISDA?
international swaps and derivatives association -ppl who trad OTC derivs, crosses borders, helped develop a standard language for things, help w disputes too.
For a call option: option premium=
intrinsic val + time val
Net Interest Margin and interest rates relationship
inverse
Equity REITs
invest directly in properties
Hybrid REITs
invest in both properties and mortgages
Mortgage REITs
invest in mortgage and construction loans
How to banks manage liquidity?
invest in short term treasury securities or other money market securities taking out new loans selling assets securitizing automobile and mortgage loans
bought deal
investment bank buys entire issue and resells; fast process
Who underwrites Rule 144A offerings?
investment banks
underwriting syndicate
investment banks grouped together to share risk
Indirect investments
investment in which a trustee is appointed to hold legal title tot he property on behalf of an investor or group of investors
Carry trade:
investors In quantity will go to country w low interest rates, and borrow there. The I rates are low bc the country is doing things right (in theory). They then go to sell the currency and find a currency in another country w rly high interest rates. Then they buy that currency, and invest at the higher interest rate. Kind of an arbitrage thing, they are exposed bc if the currencies start to shift they aren't proteced to that. This tends to work sometimes for long periods of time. If something fundamentally happens and inv try to change all at once, u do not want to be the last person in a carry trade. While its working, it is driving the currencies in opposite directions of how it should be going.
IPO flipping
investors flip shares right after buying to make high returns
Interest Rate Collars:
involves the purch of an i rate cap and the simultaneous sale of an i rate floor
using credit karma in the LT....
is a recipe for disaster
primary mkt
issuance of company stock/ipo
prob w mkt based forecasting?
it doesnt happen always. its unbaised but can be wrong.
writing a call option (naked):
know ch 14 slide 9
buying a call option:
know graph ch 14 slide 7
Venture Capital Funds
large long term investment in private firms
Federal Funds Purchased
liability to borrowing bank and asset to lending back
Note Issuance Facility
loan commitment in which the bank agrees to repurchase the commercial paper of a firm if the firm cannot place its paper in the market at an acceptable interest rate
conventional loans:
loans that have no explicit gaurantee form the federal govt
Term Loans
loans to finance purchase of fixed assets
Working Capital Loan
loans to support ongoing business operations
Interest Rate Future contracts
lock in the price at which financial instruments can be purchased or sold on a specified future settlement date; can reduce uncertainty about a bank's net interest margin
impact of an increase in a factor on option premium
look at graph on ch 14 slide 18
changed some charactersitics of FHA loans to.....
make it less appealing
art suggest if u buy a house to:
make the contract contingent on the homeowners inspection
Inside Directors
managers of the bank
systematic risk
market related risk which is non-diversifiable
Mutual fund marketplace
marketplace of funds with difference objectives managed by different companies
Maturity Matching
match each deposit's maturity with an asset of the same maturity
What stage companies do private equities buy?
mature public companies
Demand Deposit Account
pays no interest and provides checking services
Health insurance company
pays the insured all or a portion of the cost of medical treatment by doctors, hospitals, or others.
Garn-St. Germain Act of 1982
permitted depository institutions to 1. offer money market deposit accounts 2. acquire failing institutions across geographic boundaries
Garn-St. Germain Act of 1982
permitted depository institutions to 1. offer money market deposit accounts 2. acquire failing institutions across geographic boundaries
Securitization:
pooling and repackagin of loans into secutirites -then sold to investoes who becoms the owners of the loans represented by those securities
currency forecasting has....
potential to be sucessful
red herring
preliminary prospectus
MBS yields are a function of what?
prepayment risk. Residential mortgage there is nothing there stopping you from paying making prepayments. This creates uncertainty for the investor because there is uncertainty in the cash flows
Valuation of Commercial Banks
present value of all future cash flows
lockup
prevents original owners & venture capital firms from selling shares for specified period of time
gross spread
price paid for stock - reoffering price
How to measure stock risk?
price volatility, beta, value-at-risk method
what is PITI?
principal interest and taxes insurance
Private Stock Exchange
prior to IPO, private firms have their shares listed here
private placement
private sale of securities to sophisticated accredited investors; private placement memorandum supplied instead of prospectus
Private Equity
privately held business
Credit Default Swap Contracts
privately negotiated contracts that protect investors against the risk of default on particular debt securities
sale of mortgage in secondary market:
profit when u sell a mort for more than it orig cost
Volcker Rule
prohibits banks from making certain speculative investments (prop trading), is particularly costly and controversial
Short hedge:
protects against a decline in the cash price of a finacial asset or portfolio
long hedge:
protets against an increase in the cash price of a financial asset or portfolio
Consumer Finance Companies
provide financing for customers of retail stores or wholesalers, provide personal loans directly to individuals, provide mortgages
Money Market Accounts
provide high yield and provide limited checking services, with high balance requirements
Full Service Brokerage Firm
provides info and personalized advice and executes orders
proxy contest
shareholders can change board of directors if displeased
Business Finance Companies
small business loans, business credit cards
Mixed froecasting:
some MNCs use a combo of techniques
Pegged Exchange Rate System:
some currencies may be pegged to another currency or unit of account -a country that pegs it currenct doesnt have complete control over its interest rates
Securitizing Mortgages
some securities firm securitize individual mortgages by obtaining them from the financial institution of origination, bundling them into packages based on risk level, hiring a credit rating agency to assign a risk rating to the packages, and selling to institutional investors
poison pills
special rights awarded to shareholders on occurrence of specified events
golden parachutes
specifies compensation to managers in event that they lose jobs or change in control of firm
historical method of stock risk measurement
stock historical standard deviation used to forecast future risk
What's the risk of short-selling?
stock price may increase over time, forcing the short-seller to pay a higher price for the stock than the price at which it was initially sold
weak-form efficiency
stock prices reflect all historical info
strong-form
stock prices reflect all info including private or insider info
semi-strong-form efficiency
stock prices reflect all public info
dividend discount method
sum of all future dividends discounted to present
auction process
syndicates of underwriters bid against each other
open interest:
talks abt how many contracts there are that are trading at a specific delivery date for a specific commodity. if there isn a lot of open intrest the mkt might not be as robust and might not hav as much liquidiut, or not get a v good price.
Circuit breaker
temporarily halt trading on an exchange or in individual securities when prices hit pre-defined tripwires, such as a 13% intraday drop for the S&P 500, or a 15% rise in a company's share price over five minutes
Risk bearers
term that describes insurance companies; they promise to pay specified sums contingent on occurence of future events
mortgage banking?
the act of originating mortgages
Foreign exchange risk
the adverse consequences of unpredictable changes in exchange rates
Risk-based capital requirements
the capital requirements that resulted from guidelines published by the Basel Committe
maintenance margin
the minimum proportion of equity that an investor must maintain in the account as a proportion of the market value of the stock (currently 25%)
Who issues, gaurantees, registers, clears, and settles options contracts?
the options clearing corporation 1974 also standardize strike prices
Velocity of money
the rate at which money changes hands.
commerical morts are similar to residential becasue:
they look at the loan to value ratio; net op inc of property on relation to the pmt of the mortgage
You buy call option w strike price of 20. underlying stock selling at 25.
this is good, u can buy stock worth 25 at 20. intrinsic value of 5. option premium is 7. even tho the ppl kno the intrinsic val is 5. so the time value is 2.
secondary mkt
trading of stock
SEC Stock Exchange Regulates
trading on security exchange
Pawn Shops
traditional lender of last resort
for a call option: intrinsic val =
underlying asset price - exercise price (if greater than or = to zero)
spinning
underwriter allocates shares from IPO to corporate executives who may be considering IPOs
firm commitment
underwriter buys all stock
selling group
underwriting syndicate + others involved
Numeraire
unit which prices are quoted. ex: in an economy with apples and oranges, all prices maybe expressed in unites of apples
Hedge Fund regulation
unregulated in US, not required to register with SEC. Dodd Frank requires open books for periodic inspections.
overcollateralizing
used to make sure if it fails the collateral issuffficient
cross hedging:
using another asset to hedge w the actual asset u wanted to (if ur exact one doesnt have futures options)
underwriter discount for bonds
usually 0.5% or 50 basis points
Mortgage Origination Reform
verify income, job status, and credit history before approving mortgages
initial margin requirements
which represent the minimum proportion of funds that must be covered with cash (currently 50%)
does froeign exchange risk matter to individuals?
yes for: traveling, prices bc overseas manufacturing -if value of dollar heeks risinf then its psosible ur job might go overseays. day to day ppl dont notice it but it can greatly affect cost of living and many other aspects of ppls lives
market-based forecasting:
• The process of developing forecasts from market indicators, usually based on either the spot rate or the forward rate. - Use of the Spot Rate: corporations can use the spot rate to forecast because it represents the market's expectation of the spot rate in the near future. - Use of the Forward Rate: Speculators would take positions if there were a large discrepancy between the forward rate and expectations of the future spot rate.
risk w mort origing:
•pipeline risk -price risk: risk of adverse effecct on value of pipeline if mort rates rise -fallout risk: risk tht applicants w commit letters will not close
